Dave Ramsey answers questions from all over the world on his very popular radio show, and over the years, he has gotten many, many questions from federal employees about their Thrift Savings Plan accounts and retirement.
In general, Dave Ramsey has some great advice, but sometimes it doesn’t apply perfectly to everyone. The more I think about it, Dave Ramsey has a hard job. He has to give advice on the spot that has a high probability of applying to a large group of people. Consequently, that advice may not always be very specific or tailored to your situation, but if I was in Dave’s shoes and spoke to millions of listeners a week, I would have to make my advice generic as well.
With that said, here is some of Dave’s advice on the TSP along with my comments.
Dave’s Thoughts on When to Invest in the TSP
He says you should be debt free except for your mortgage before you start investing in the TSP. He also encourages you to have a 3-6 month emergency fund before you begin investing.
I do agree that you should have an emergency fund before you think about long-term investments. You don’t want to be forced to sell investments when the market is down because something happens in your personal life.
In an ideal situation, everyone would be debt free and still have lots of time to prepare for retirement. For many people, if they waited to be debt free (except their mortgage), they would have much less time to save and let their TSP grow. It often makes sense to attack debt while also saving in the TSP. This would allow you to get your agency’s match while also getting you in the habit of consistently investing.
That being said, credit card debt and other high-interest debt should be attacked as quickly as possible.
Overall, there is no perfect formula. Each persona will have to find a balance between tackling debt now and preparing for the future.
Dave’s Thoughts on TSP Contribution Allocations
He openly suggests on his website that federal employees should invest their TSP in either an 80% C fund, 10% S fund, and 10% I fund mixture or 60% C Fund, 20% S Fund, and 20% I Fund.
Let me start off by saying that there is no such thing as a bad TSP allocation, but there are not one or two allocations that make sense for everyone. Dave’s allocations are very aggressive and this may make sense for younger employees that have lots of time before retirement.
However, as people approach retirement, their needs change. If someone invests aggressively up until retirement, they are taking a risk that the market might drop dramatically right before or right when they retire. If this happens, it is very difficult for them to recover because they often have to start withdrawing from their TSP when the market is low to maintain their retirement lifestyle. Most people will want a more balanced strategy to give them more stability into retirement.
Dave’s Thoughts on Rolling Your TSP Over to an IRA
He suggests that federal employees should always move their TSP accounts into an Individual Retirement Account (IRA) as soon as they are able to do so. For most feds, this is at retirement.
An IRA is a great tool and has a lot of great uses. But just like a hammer, it is not perfect for every job.
Here are some of the pros and cons of keeping your TSP
- You are familiar with it and know what the investment options are.
- The fund fees are low.
- Limited investment and withdrawal options
Here are some of the pros and cons of moving your TSP to an IRA:
- More investment options and withdrawal flexibility.
- Potentially higher fees if you don’t find low-fee investment options.
- More complex
So again, there is no clear-cut answer. It just depends on what you care about the most and what you want to deal with in retirement.
Overall, I think Dave Ramsey has some great advice. The world would definitely be a better place if more people took his advice, but just like all advice (mine included), it is up to you to decide if it makes sense for you.